Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Instead of an orderly burial, the wind-down of an Austrian bank is turning into a scene from The Walking Dead.

Seven years on from the bailout of Hypo Alpe Aldria Bank, private investors and politicians are still at loggerheads over who should foot the bill. While Hypo Group itself is no more, Heta, the "bad bank" designed to wind down the business over time, is now the problem: it disclosed a 7 billion-euro ($8 billion) capital hole last year.

The two sides will on Tuesday meet to try and hammer out a compromise. On the surface, this looks like a step towards a rapid conclusion -- but progress is more likely to resemble the slow and shambling march of the zombie undead. Ultimately, the victim won't just be Austria but Europe at large, which is struggling to draw a line under a banking crisis that is nearly a decade old.

A European state like Austria should be expected to have the upper hand in a tussle over a bank failure, especially given how governments now have powers to force losses onto private investors instead of taxpayers -- bail-ins, in the jargon, rather than bail outs. Austria's banking regulator fired a shot across bondholders' bows over the weekend, when it slashed the value of debt Heta owes.

But it's not as simple as clubbing senior creditors around the head. Carinthia, a province in the Eastern Alps, had guaranteed 11 billion euros of Heta's debt. That's why Carinthia, rather than Austria, will meet with creditors on Tuesday. It also explains why bondholders have been revolting against what they see as strong-arm tactics. Last month, Commerzbank and Pimco led the charge against a Carinthian attempt to neutralize those state guarantees; they clearly reckon that they have the law on their side and have sued in a German court.

Slippery Slopes
As a percentage of GDP, Austria's government debt guarantees are the highest in the EU
Source: Eurostat, 2013 data on contingent liabilities.

So rather than addressing a take-it-or-leave-it offer, this negotiation is likely to be the first round of a game of chicken. Carinthia already faces a bill of about 6.4 billion euros due to the haircut over the weekend; Austria has asked creditors not to gamble with the insolvency of an entire province. Unimpressed creditors will likely hold out for as much as possible, arguing that guaranteed debts must be paid -- whether by Carinthia or Austria. On past form, this match may go on for a while.

Heta is the first big test of the EU's post-crisis effort to get taxpayers off the hook for failed banks. In Italy, banks are moving to create a fund that will help its weakened banks raise capital -- without flouting state aid rules. They, along with the rest of the region's industry, will need private money.

A deal in Austria would provide reassurance for some very spooked investors -- and give some relief to a region where economic growth is to a great extent a hostage to banks' fortunes. But expect some scares along the way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net